Weyerhaeuser Company — Form 10-Q Summary
Business context and reporting period
Weyerhaeuser is a REIT principally engaged in timberlands, wood products, real estate, energy and natural resources. The filing covers the quarter and year-to-date periods ended June 30, 2018, compared with the corresponding 2017 periods. Reportable segments are Timberlands, Real Estate & ENR, and Wood Products.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Net sales | $2,065 million | $1,808 million | $3,930 million | $3,501 million |
| Gross margin | $618 million; 29.9% | $472 million; 26.1% | $1,135 million; 28.9% | $893 million; 25.5% |
| Operating income | $476 million; 23.1% | $157 million; 8.7% | $880 million; 22.4% | $450 million; 12.9% |
| Net earnings | $317 million | $24 million | $586 million | $181 million |
| Diluted EPS | $0.42 | $0.03 | $0.77 | $0.24 |
| Adjusted EBITDA | $637 million | $506 million | $1,181 million | $960 million |
| Cash from operations | Not separately provided | Not separately provided | $733 million | $524 million |
Q2 sales increased 14%, while year-to-date sales increased 12%. Wood Products generated Q2 sales of $1,525 million and net contribution to earnings of $329 million. Timberlands generated sales of $482 million and contribution of $161 million. Real Estate & ENR generated sales of $58 million and contribution of $22 million.
At June 30, 2018, cash and cash equivalents were $901 million, compared with $824 million at December 31, 2017. Total debt consisted of $5,924 million of company long-term debt plus $511 million of nonrecourse debt held by variable interest entities. The company had no borrowings under its $1.5 billion revolving credit facility, which expires in March 2022, and was in compliance with debt covenants.
Year-to-date investing cash outflows were $149 million, including $178 million of capital expenditures and timberlands reforestation spending. Financing cash outflows were $507 million, including $485 million of common dividends and $62 million of debt repayment. The quarterly dividend increased to $0.32 per share from $0.31 in the comparable 2017 quarter.
Material changes versus the prior comparable period
- Wood Products sales increased 18% in Q2 and 16% year-to-date, primarily from higher selling prices for structural lumber, oriented strand board and other products. Segment contribution increased 86% in Q2 and 72% year-to-date.
- Timberlands sales increased 3% in both Q2 and year-to-date periods. Western log prices increased 20% in Q2 and 26% year-to-date, partly offset by lower Western volumes and the 2017 divestiture of the Uruguayan operations.
- Real Estate & ENR sales increased 26% in Q2 and 10% year-to-date, but contribution declined 4% in both periods because of lower average prices per acre and higher real estate basis.
- Operating income benefited from the absence of the $147 million noncash impairment charge recorded in Q2 2017 for the Uruguayan operations.
- Product remediation expense declined to a net $20 million in Q2 2018 from $50 million in Q2 2017. Year-to-date 2018 included a net recovery of $0 million, compared with $50 million of charges in the prior-year period.
- Net cash from operations increased $209 million year-to-date, primarily due to stronger operating cash generation, lower income-tax and interest payments, and insurance recoveries, partly offset by remediation spending.
Guidance, outlook, commentary, risks and unusual items
- Management expected U.S. housing starts of approximately 1.30 million units in 2018, representing an 8% increase from 2017, and expected North American lumber consumption to grow approximately 4%.
- Management expected 2018 net capital expenditures of approximately $420 million, comparable to 2017.
- The company recorded a $28 million pretax environmental remediation charge in Q1 2018 related to the Kalamazoo River Superfund site. Total accruals for future estimated remediation costs were approximately $69 million at June 30, 2018.
- The company recorded a $199 million improvement in pension funded status from updated mortality assumptions and census data; this was reflected in other comprehensive income and was not an operating cash benefit.
- A pending IRS matter concerning Plum Creek's 2008 tax treatment could require recognition and distribution of approximately $600 million of gain and payment of approximately $100 million of built-in gains tax, plus substantial interest, if the company is unsuccessful. No reserve was recorded.
- Key risks include housing and construction demand, lumber and log prices, raw-material costs, tariffs and trade restrictions, weather and natural disasters, manufacturing disruptions, environmental regulation, legal proceedings, pension investment performance and tax matters.
- The company adopted the revenue recognition standard ASC 606 and certain financial-instrument guidance in 2018; management stated that the adoption did not materially affect the financial statements. The company plans to adopt the new lease standard on January 1, 2019.
Important facts for investors to verify
- Whether elevated Wood Products pricing and margins are sustainable as housing demand, supply, tariffs and raw-material costs change.
- The remaining scope and ultimate cost of Flak Jacket product remediation and related insurance recoveries.
- The outcome and potential cash, tax and distribution consequences of the IRS litigation.
- Future environmental remediation obligations, including the Kalamazoo River matter and the approximately $69 million recorded accrual.
- Debt maturities, including $500 million of fixed-rate debt due in 2019, and the company’s ability to fund dividends, capital spending and other obligations.
- Whether the 2018 housing-start and $420 million capital-spending expectations are achieved.